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Turkey Bonds, Lira Slide to Record Lows on Central Bank Concerns

(Bloomberg) -- Turkey’s currency and government bonds slid to record lows on concerns monetary policy still remains too loose to anchor the nation’s assets.

The lira fell as much as 1.8 percent to 4.2901 per dollar and the yield on 10-year notes climbed 38 basis points to 13.83 percent, as speculation mounted policy makers will have to raise interest rates to stem the rout.

Turkey’s economy remains one of the most exposed to a stronger dollar, which is pushing higher against most global peers ahead of jobs data in the U.S. on Friday. Turkey’s current-account deficit, at more than 5 percent of output, leaves the lira dependent on foreign capital inflows, while inflation continues to run in the double digits.

“Monetary policy stands out as the only tool to manage demand, restore credibility and hence anchor expectations,” said Yarkin Cebeci, an economist at JPMorgan Chase & Co. The central bank’s rate increase last week “was not enough to restore the confidence in the bank or the lira,” he said, adding policy makers need to “act earlier rather than later.”

One-year cross currency swap rates pushed higher for a fifth day, jumping as much as 79 basis points to touch 16.01 percent, the highest since 2008. Turk Ekonomi Bankasi AS strategist Erkin Isik said forwards are pricing between 125 basis points and 150 basis points of hikes over the next nine months.

The central bank has raised borrowing costs by more than 500 basis points since the beginning of 2017, but looser fiscal policy and a government-backed credit binge before snap elections in June have outweighed much of that. S&P Global Ratings downgraded the nation’s debt on Tuesday, saying the economy is overheating and risks a hard landing.